From Radly Bates Valuations:
From our founders Adam Radly and Bob Bates:
Adam Radly Bob Bates have raised capital all over the world. Mr. Bates has performed over 50 valuations in various industries, for different purposes. This is an explanation of the main types of valuations:
A business valuation is an opinion of the fair market value of a business (or portion of a business). It assesses a variety of factors to determine the fair market value in sale.
Fair market value is the price at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, neither of whom are under any compulsion to buy or sell, with both having reasonable knowledge of relevant facts.
Why have business appraisals?
Business valuations are performed for a variety of reasons. Some valuations are required such as in when business ownership interest is gifted or transferred as part of an estate, or in the cases of estate taxes or marital dissolution, while others arise from the desire to identify a value, such as a basis for a business purchase or sale. The primary purpose of business valuation is preparing a company for sale. Regardless of the reasons, it is crucial to have a business valued by a business valuation expert who is proficient not just in analysing the financial statements but also who has an understanding in converting those accounting numbers into estimates of future performance, which ultimately create the basis for value in today’s dollars.
The most common reasons why a business may need to be appraised are:
- Buying or Selling a Business
- Marital Dissolution (Divorce)
- Estate Planning for Gifts or Inheritance
- Family Limited Partnerships or Limited Liability Companies
- Employee Stock Ownership Plans (ESOPs)
- Litigation Issues involving Lost Profits or Economic Damages
- Stockholder Disputes
- Insurance claims
- Intangible impairment testing
- Mergers & Acquisitions, Reorganizations, Liquidations, and Bankruptcy
- Allocation of purchase price
- Buy-Sell Agreement
Another tool that helps in valuation of your business is business valuation calculator. It is of immense help especially in valuation of small businesses. If you are a buyer, the business valuation calculator will tell you whether the business you want to purchase is in the realm of affordability and if you are a seller, the calculator is a reality check. It provides you an estimation of what price you can charge if you want to attract potential buyers.
The valuation section is the most important part of the report which discusses the different valuation approaches and methods.
It determines the value indicative of a business usually for the purposes of insurance coverage or for the sale or purchase of the business using one or more valuation methods.
- Asset Approach
- Income Approach
- Market Approach
The Asset Approach – It is also known as the cost method and in this, we seek to measure value through the calculation of assets net of liabilities. One can use book or market values of assets in this approach and is significant for a business that is closed down and being liquidated.
The Income Approach – In this approach, we seek to measure the income generated by the business through its operation. Here the appraisal utilises information and technique from accounting and financing.
The Market Approach – In this approach, we seek to measure business value through comparison. The subject company is compared to other businesses or business interests that have sold. This type of valuation focuses on the comparative transaction method and appraises competitive sales of comparable businesses.
Commonly Used Business Appraisal Method
Adjusted Net Book Value Method
The most commonly used strategy within the asset approach is called the Adjusted Net Book Value Method or Asset Valuation Method. In this strategy, all assets and liabilities are adjusted to their fair market values, which may be a going concern value or liquidating value, depending on which is more appropriate in the context of the valuation. The fair market value of stockholder equity is then calculated by subtracting the equitable value of the liabilities from the fair market value of assets. This method generally is applicable as the primary valuation approach for two types of businesses: (a) those about to be liquidated, and (b) holding companies whose operating companies are publicly traded.
The major shortcoming of this strategy is that it is ineffective in accounting for unidentified intangible assets but not limited to goodwill and assembled workforce value. Therefore to the extent that these assets are missing from a fair market value Balance Sheet, the Adjusted Net Book Value estimate of fair market value will be too low. In addition to this, it is not always economically practical to calculate the fair market value of every asset and liability, which introduced additional valuation error into this method.
Discounted Future Cash flow (DCF) Method
Within the income approach, the Discounted Cashflow Method depends on the concept that the value of a business is best estimated by the presently estimated value of the net income, cash flow, or dividend streams it can generate in the future. These evaluated surges of a business venture are then adjusted to reflect the time value of money as well as the associated business and economic risks of that enterprise.
The DCF Method is broadly recognised as the theoretically most valid approach. One can forecast net income, cash flows or dividends and then discount them to their net present value. The method is used only when cash flow information is not feasible. This is beacuse most privately held firms do not pay dividends and also it is less accurate than the Discounted Cash Flow Method.
Guideline Company Method
The Guideline Company Method is a strategy within the market approach, which analyses the subject to similar businesses that have been sold. The Guideline Company Method involves developing either relapse analysis and/or ratios of stock price to earnings (P/E Multiples), cash flow (P/CF Multiples), and Book Value (P/BV Multiples). The stock prices are those of public companies in the same or similar business as the company. Consideration is given to the opinion of informed investors and what they are willing to pay for the stock of comparative public companies as adjusted for the specific circumstances of the company.
P/E multiples set up in dynamic exchanging are expressions of what prudent, arms-length investors accept are fair and reasonable rates of return for these securities, given the risk inherent in those businesses. A risk analysis is then performed to compare the company to the publicly-traded firms in terms of size, diversity of operations and products, financial strength, profitability, growth, and other factors recognised as key indicators of risk in order to adjust the P/E multiple.